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Types of Investments
Types of Investments • Stocks • Bonds • Mutual Funds • Real Estate • Savings/Certificates of Deposit • Collectibles
Stocks • An investment that represents ownership in a company or corporation.
How Well the Stock Market is Doing Overall
3 Basic Indicators • Dow Jones Industrial Average (“DOW”) – Lists the 30 leading industrial blue chip stocks • Standard and Poor’s 500 Composite Index – Covers market activity for 500 stocks – More accurate than DOW because it evaluates a greater variety of stock • National Association of Security Dealers Automated Quotations (“NASDAQ”) – Monitors fast moving technology companies – Speculative stocks, show dramatic ups and downs
Ups and Downs • The term bull market means the market is doing well because investors are optimistic about the economy and are purchasing stocks • The term bear market means the market is doing poorly and investors are not purchasing stocks or selling stocks already owned
Brokers • A Broker is a person who is licensed to buy and sell stocks, provide investment advice, and collect a commission on each purchase or sale – Purchases stocks on an organized exchange (stock market) – Over ¾ of all stocks are bought and sold on an organized exchange
Organized Exchanges • Minimum requirements for a stock to ensure only reputable companies are used • Each exchange has a limited number of seats available which brokerage firms purchase to give them the legal right to buy and sell stocks on the exchange
New York Stock Exchange • New York Stock Exchange (NYSE) – Oldest and largest, began in 1792 – 1, 366 seats available – 2, 800 companies – Average stock price is $33. 00 – Strict requirements
American Stock Exchange • American Stock Exchange – Began in 1849 – 2 nd largest exchange – It’s requirements are not as strict as NYSE allowing younger, smaller companies to list – Average stock price is $24. 00
Regional Stock Exchanges • Regional Stock Exchanges – Stocks are traded to investors living in a specific geographical area • Including Boston, Cincinnati, Philadelphia, Spokane
NASDAQ • National Association of Securities Dealers Automated Quotations – Stocks are traded in an over the counter electronic market – 4, 000 small companies • Company requirements are not as strict – More volatile because companies are young and new – Average stock price is $11. 00
Bonds • A security representing a loan of money from a lender to a borrower for a set time period, which pays a fixed rate of interest.
Mutual Funds • An investment that pools money from several investors to buy a particular type of investment, such as stocks.
Real Estate • An investor buys pieces of property, such as land or a building, in hopes of generating a profit.
Savings/Certificates of Deposits • A deposit that earns a fixed interest rate for a specified length of time. – The longer the time period the greater the rate of return. – There is a substantial penalty for early withdrawal.
Collectibles • Unique items that are relatively rare or highly valued. – Art work – Baseball trading cards – Coins – Automobiles – Antiques
Risk vs. Return • On average, stocks have a high rate of return – The increase or decrease in the original purchase price of an investment • Higher rate of return = greater risk – Uncertainty about the outcome of an investment • Stocks provide portfolio diversification – Money invested in a variety of investment tools
Short-term Investment Strategies • Buying on margin is where an investor borrows part of the money needed to invest in a stock from a brokerage firm. – There is a 50% margin requirement. – If you want to purchase $2, 000 worth of stock you can borrow up to $1, 000 to make the purchase.
Short-term Investment Strategies • Short selling is where an investor sells shares of stock that they don’t own with the intent to buy them back later at a lower price. – Let’s use rollerblades as an example.
• Your friend buys new rollerblades for $80. • You borrow them and sell them for $80. • The price at the stores has been lowered to $45. • You buy a new pair for $45 and give them to your friend. • You made $35!!!
Long-term Investment Strategies • Diversification is spreading your assets among different types of investments to reduce risk. – Don’t put all your eggs in one basket.
Long-term Investment Strategies • Dollar Cost Averaging is buying an equal amount of the same stock at equal intervals. – Invest $100 in e-bay every month. The price you pay for the stock averages out over time.
Dollar Cost Averaging One-Time Investment Amount Invested Shares Share Price ($) Purchased $1, 000. 00 $20. 00 50. 00 Dollar-Cost Averaging Amount Invested $100. 00 $100. 00 $1, 000. 00 Shares Share Price ($) Purchased $20. 00 $19. 50 $19. 25 $19. 75 $19. 20 $18. 90 $18. 00 $18. 60 $19. 78 $20. 90 $19. 39* 5. 00 5. 13 5. 19 5. 06 5. 21 5. 29 5. 56 5. 38 5. 06 4. 78 51. 66 * Average Share Price
Long-term Investment Strategies • Buy and hold technique is where an investor buys stock and holds on to it for a number of years. – During that time you are paid dividends and the price of the stock may go up.
How Can Government Regulations Protect Investors? • Regulatory Pyramid – A network of safeguards that surrounds the securities industry from individual brokerages all the way up to the U. S. Congress.
Regulatory Pyramid www. nyse. com
Sources of Investment Information • Prospectus – A formal written offer to sell securities that sets forth a plan for a proposed business enterprise. A prospectus should contain the facts that an investor needs to make an informed decision.
Sources of Investment Information • Annual report – A document detailing the business activity of a company over the previous year, and containing an income statement, cash flow statement, and balance sheet.
Sources of Investment Information • Financial publications – Wall Street Journal – Fortune – Kiplingers Personal Finance • Online information – http: //finance. yahoo. com – http: //moneycentral. msn. com
How Do You Buy and Sell Investments? • Full-service broker • Discount broker • Online broker • Investment advisors